Wachovia announces change in loan guidelines

CHARLOTTE -- Amid deteriorating conditions in some housing markets, Wachovia on Friday said it will change the way it evaluates potential mortgage borrowers, including requiring minimum credit scores and requiring verification of assets and employment.

The change, which starts April 26, applies to loans the Charlotte-based bank keeps in its own portfolio, including so-called Pick-A-Payment mortgages and fixed-rate "jumbo" mortgages. More traditional loans that are sold off to investors are not affected by the decision.

Wachovia started making Pick-A-Payment loans after buying Golden West Financial in 2006 for $24 billion. These loans, which can come with adjustable rates and a variety of monthly payment choices, have been showing higher delinquency rates than traditional loans.

Golden West billed its process for vetting borrowers as a "common sense" approach that didn't rely on credit scores. Instead, the company focused on the value of the property and the customer's cash flow.

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Wachovia spokesman Don Vecchiarello said the company will continue to use the same methods, but now there will be an "additional layer" of meeting a minimum credit score hurdle. Employment and asset verification will be required, where in the past it was done on a "case-by-case basis," he said.

The bank is making the move as places such as California and Florida are experiencing value declines of up to 25 percent. About 70 percent of Wachovia's $120 billion Pick-A-Payment portfolio is in these two states.

Wachovia will evaluate markets by home pricing index, inventory levels and absorption rate and assign one of three levels of risk: stable, watch and stressed. Each market will have different lending requirements. "The important thing to remember is this is driven by market conditions," Vecchiarello said. "It's not product-driven."

The company did not disclose the minimum credit scores it would require. The widely used "FICO" scores created by Fair Isaac Corp. have a 350 to 800 range. A higher score means a borrower is less risky to a lender, based on past credit history.

Vecchiarello said Wachovia would be in compliance with all fair lending standards under the move. He said no job cuts are associated with the change.

The bank said Wachovia and Golden West have adjusted lending standards during past downturns.

"These changes will position Wachovia Mortgage to navigate through the current economic cycle," David Pope, head of Wachovia's mortgage operations, said in a memo to employees on Friday. "We will be closely monitoring market conditions and will continue to make underwriting adjustments as appropriate."

Sandler O'Neill analyst Kevin Fitzsimmons said the change was a "prudent" decision by Wachovia. "It's, 'How can we still make loans and sleep at night?'." he said.

Fitzsimmons said he wouldn't call it a "capitulation" to criticism of the Golden West deal, which was made at the peak of the housing boom. "It's an acknowledgment that as good as Golden West's track record was, things have changed," he said.

In a report in February, Keefe, Bruyette & Woods analyst Jefferson Harralson said about 21 percent of the bank's Pick-A-Payment borrowers had credit scores of 620 or less. That compared to an average of about 2 percent at lenders that made similar loans.

"Wachovia states that its approach to underwriting was more about getting the right value on the real estate versus underwriting the consumer, which has translated into lower FICO scores, but not necessarily higher losses," Harralson wrote in the report.

"In an environment where real estate values are falling relatively sharply, Wachovia's model will be put to the test."